Term
| Efficient Market Hypothesis (EMH) |
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Definition
Extension of RE model to finance:
Prices reflect all available information - prices are ALWAYS optimal.
Prices are not predictable - random walk
No bubbles - investment implication: buy and hold index fund (diversify).
In conclusion, it's ok to ignore finance. |
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Term
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Definition
Microfoundations; NR Hypothesis; RE...we still get Keynesian results:
Market failure; persistent deviations of Y from Ynr; role for stabilization policy. |
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Term
| New Keynesians don't agree with these 6 things |
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Definition
| 1)General theory is useful reading (not rigorous!) 2)Classical economics is not helpful (very useful!) 3)Growth is threatened by excessive savings (NO! savings=investment) 4)Fiscal policy is more powerful than monetary policy (fiscal policy multipliers are small) 5)Inflation is a necessary consequence of stabilizing output (fuck that Phillips curve!) 6)Policy should be discretionary, not rule based (rule-based policies are better i.e. inflation rule) |
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Term
| New Keynesian models focus on price inflexibility, which includes... |
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Definition
1)Menu costs
2)Mark-up pricing theories
3)Price contracts
4)Service considerations
5)Concerns over relative prices |
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Term
| Wage inflexibility theories |
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Definition
1)Explicit contracts
2)Implicit contracts
3)Minimum wage contracts
4)Insider-Outsider Model
5)Efficiency Wage Model |
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Term
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Definition
Two step process:
1)Figure out efficiency wage that maximizes profits
2)Plug this efficiency wage into Ld curve to get L* |
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Term
| New Keynesians Business Cycles |
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Definition
B-cycles have multiple causes:
AD shocks: ↓expectations → ↓AD →excess in goods market (p inflexibility) and unemployment (wage inflexibility). Overtime, public ↓Pe+ w &P adjust → ↑SRAS until Y=Ynr |
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Term
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Definition
| AS shocks: ↓AS from prod shock → no policy response as trying to shift AD would lead to inflation. |
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Term
| What are the pros of NK models? |
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Definition
Pros:
-Flexible/pragmatic
-Take best of previous therios
-Consistent with AD and AS shocks |
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Term
| What are the cons of NK models |
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Definition
Cons:
-Very broad-a pot of undeveloped ideas.
-Not a unified theory
-Is is a theory at all? |
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